Conceptual characteristics of bilateral market

Two groups of participants need to trade through the middle layer or platform, and the income of one group of participants joining the platform depends on the number of participants joining the platform (Armstrong, 2004). Such a market is called a bilateral market. Two-sided market involves two different types of users, and each type of user gains value by interacting with the other type of users through the platform (Wright, 2004). The basic structure of the bilateral market is shown in figure 1. Rochet and Tirole(2004) defined and distinguished two-sided market and one-sided market under the condition of only using externalities. Consider a platform that collects aB and aS fees from buyers and sellers. If the transaction volume V realized on the platform only depends on the total price level a=aB+aS, that is, when the total price is insensitive to the redistribution of buyers and sellers, the market where both parties interact is a unilateral market. On the other hand, if V changes with aB under the condition that A remains unchanged, the market is a bilateral market.

The bilateral market has obvious characteristics:

(1) There is network externality between two groups of participants, that is, network externality between markets. Since Katz and Shapiro( 1985), there have been a lot of literatures about the externalities of market networks. However, in some cases, such as the media industry, network externalities will occur between the two markets, and the utility of products produced in a specific market will change with the demand of products produced in another market, and vice versa, which is called bilateral network externalities.

(2) Adopting multi-product pricing. The middle tier or platform must also price the products or services it provides. From an empirical and normative point of view, bilateral market is different from oligopoly or monopoly of multi-products (Rochet &; Tirole, 2003a). However, the literature of multi-product pricing does not consider the externalities in the consumption of different products: a famous example is used to illustrate that razor buyers internalize the net surplus obtained by purchasing razor blades in their purchase decisions. On the contrary, the starting point of the two-sided market theory is that one kind of end users have not internalized the welfare impact of their platform on other types of users (Rochet &: Tirole, 2004).

These two characteristics exclude many situations that seem to be bilateral markets. There are many examples of competitive platforms, which bring two groups of agents together and improve the surplus, but the network effect between the two groups does not exist. For example, enterprises need to compete for consumers and labor in the output market. But workers usually care about wages and don't care about how many products they sell, while consumers usually care about prices and don't care about how many workers companies employ. In addition, there are externalities between two groups, but there is no example of the platform as an intermediary at all. An obvious example comes from economic geography, where a group of residents especially want to live in a place that complements another group of residents (Armstrong, 2004).

Bilateral markets exist widely in the real world. Many traditional industries such as media, intermediary industry and payment card system are typical bilateral markets. With the rapid development and wide application of information and communication technology, various new forms of bilateral markets have emerged, such as B2B, B2C electronic markets and portals. Table 1 lists specific examples of bilateral markets.